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Is the relation between non-controlling interests and parent companies misleading?

Ana Isabel Lopes, Isabel Costa Lourenço, Mark T Soliman and Manuel Branco
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Isabel Costa Lourenço: Business Research Unit (BRU-IUL), ISCTE-IUL Instituto Universitário de Lisboa, Lisboa, Portugal
Mark T Soliman: USC Marshall School of Business, University of Southern California, Los Angeles, CA, USA

Australian Journal of Management, 2021, vol. 46, issue 1, 24-50

Abstract: This article investigates whether different levels of investor protection affect the equity market’s valuation of non-controlling interests (NCIs) in a consolidated corporate entity. Using a set of publicly listed European firms, our findings suggest a positive (negative) association of NCIs with parent companies’ share prices in countries with low (high) levels of investor protection. We interpret the findings as evidence that when non-controlling investors are not well-protected, parent companies have an opportunity to extract rents from non-controlling owners, leading to a positive valuation of NCIs’ equity. However, in countries where non-controlling investors are well-protected, parent companies are not able to extract rents but still must monitor and govern the related subsidiary; thus, NCIs become a net cost, and the relation inverts. JEL Classification: M41, M48

Keywords: Institutional characteristics; investor protection; legal origin; non-controlling interests; parent companies; value relevance (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1177/0312896219896388

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